(Update to this post 3/26/17: HUD has reversed this policy prior to the implementation of the reduction in the mortgage insurance premium. The article below will be updated if there are changes.)
The cost of your new FHA home loan is coming down significantly this year. The move eases the weight on the pocketbooks of many Arizona buyers who are home shopping in 2017, especially first-time buyers.
The change is projected to save the average FHA-insured homeowner over $500 annually on recurring mortgage insurance premiums. The new ruling applies to loans closed on or after January 27, 2017.
The Secretary of Housing and Urban Development (HUD), Julián Castro, announced the change today to the agency’s flagship loan program, the FHA home loan. HUD oversees the Federal Housing Administration (FHA).
FHA home loans are offered with down payments as low as 3.5% of the purchase price. The loans emerged from near obscurity before the housing crisis. Then in 2009, they commanded almost 21% of the mortgage market due to the low down payment requirement. In Q2 2016, FHA loans represented a 16.6% market share of all home loans in the United States.
The move reduces the part of an FHA home loan called the annual mortgage insurance premium (MIP). The cost of mortgage insurance is borne by the buyer and is a component of the monthly mortgage payment. Mortgage insurance shields the lender against a buyer default.
The announcement today drops the mortgage insurance premium (MIP) that FHA charges annually on loans by 25bps (basis points) or .25% of the base loan amount.
For example, the amount of mortgage insurance charged on a 30-year $200,000 FHA home loan originated with only 3.5% down was previously 85bps (basis points). This equates to .85% of the base loan amount, $1700 annually or $141.66 monthly. The new insurance rate after today’s announcement, calculated at 60bps, would be $1200 annually or $100 per month. That’s a savings of $499.92 per year to the consumer.
The ruling today may help to offset rising mortgage costs that consumers have recently experienced. Mortgage interest rates rose steadily in Q4 2016. The reductions in mortgage insurance premiums do not apply to FHA Streamline Refinance or FHA Simple Refinance programs.
Let my team help match you with an Arizona FHA lender for your home or condo purchase. We can be reached at the phone number in the banner when you are ready to begin your Phoenix home search.
The text of the FHA announcement is available here.
While I encourage people to save 100% down for a home, a mortgage is the one debt that I don’t frown upon. – Dave Ramsey, syndicated radio host, New York Times Best Seller author and consumer financial education speaker